ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. FORWARD-LOOKING STATEMENTS AND ANALYSTS' REPORTS
This Form 10-Q and our future filings on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "projects", "seeks", "should" and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):
• Our ability to successfully consummate the Merger Agreement with affiliates of
ATN International, Inc. and Freedom 3 Investments IV, LP , a fund advised by
Freedom 3 Capital, LLC , and the potential disruption the merger could cause to
our operations
• our ability to obtain and appropriately allocate capital and other resources
to support our growth objectives
• our ability to keep pace with rapid technological developments and changing
standards in the telecommunications industry, including on-going capital
expenditures needed to upgrade our network to industry competitive speeds,
particularly in light of expected 5G deployments by mobile wireless carriers
• our ability to invest sufficiently in our underlying physical infrastructure,
including buildings, fleet and related equipment
• governmental and public policy changes and audits and investigations,
including on-going changes in our revenues, or obligations for current and
prior periods related to these programs, resulting from regulatory actions
affecting on-going support for state programs such as Essential Network
Support, and federal programs such as the rural health care universal service
support mechanism, including ascertainment of the "urban rate" and "rural
rate" used to determine federal support payments for services we provide to
our rural health care customers for current and prior periods, some of which
are currently under audit or subject to an inquiry
• our ability to comply with the regulatory requirements to contribute to the
Universal Service Fund and receive support payments from that fund
• our ability to continue to develop and fund attractive, integrated products
and services to evolving industry standards, and meet the pressure from
competition to offer these services at lower prices
• our size, because we are a smaller sized competitor in the markets we serve,
and we compete against large competitors with substantially greater resources
• our ability to maintain our cost structure as a focused broadband and managed
IT services company, which could impact both cash flow from operating
activities and our overall financial condition
• the Alaskan economy, which has been impacted by continued low crude oil prices
which are creating a significant impact on both the level of spending by the
State of Alaska and the level of investment in resource development projects
by natural resource exploration and development companies in Alaska , together
with the ongoing cuts to the state of Alaska budget and resulting spending
reductions, all of which may impact the economy in the markets we serve and
impact our future financial performance
• our ability to maintain successful arrangements with our represented employees
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• disruptions or failures in the physical infrastructure or operating systems
that support our businesses and customers, or cyber-attacks or security
breaches of the physical infrastructure, operating systems or devices that our
customers use to access our products and services; due to the COVID-19
pandemic, many of our employees are temporarily working remotely, which may
pose additional data security risks
• a maintenance or other failure of our network or data centers
• a failure of information technology systems
• our ability to attract, recruit, retain and develop our workforce, and
implement succession planning necessary for achieving our business plan
• the successful completion of our project for the development and installation
of certain critical new IT systems associated with sales and opportunities,
customer service delivery, operational support, customer billing and
collection, analytics, and other applications; and our ability to adequately
invest in the maintenance and upgrade of our networks and other information
technology systems in the future
• unforeseen challenges when entering new markets and our ability to recognize
and react to actions, products or services of competitors that threaten our
competitive advantage in the marketplace
• the success of the Company's expansion into managed IT services, including the
execution of those services for customers
• structural declines for voice and other legacy services within the
telecommunications industry
• a major public health issue, such as an epidemic or pandemic, and including
the current COVID-19 pandemic, could adversely affect global, national, state
and local economies, the operations and financial stability of our customers
and vendors, and our operations, financial performance and liquidity
• geologic or other natural disturbances relevant to the location of our
operations
• unanticipated damage to one or more of our undersea fiber optic cables
resulting from construction or digging mishaps, fishing boats or other reasons
• our ability to meet the terms of our financing agreements and to draw down
additional funds under the facility to meet our liquidity needs
• the cost and availability of future financing, at the terms, and subject to
the conditions necessary, to support our business and pursue growth
opportunities; our debt could also have negative consequences for our
business; for example, it could increase our vulnerability to general adverse
economic and industry conditions, or limit our flexibility in planning for, or
reacting to, changes in our business and the telecommunications industry; in
addition, our ability to borrow funds in the future will depend in part on the
satisfaction of the covenants in our credit facilities; if we are unable to
satisfy the financial covenants contained in those agreements, or are unable
to generate cash sufficient to make required debt payments, the lenders and
other parties to those arrangements could accelerate the maturity of some or
all of our outstanding indebtedness
• the success or failure of any future acquisitions or other major transactions
• a third-party claim that the Company is infringing upon their intellectual
property, resulting in litigation or licensing expenses, or the loss of our
ability to sell or support certain products
• unanticipated costs required to fund our post-retirement benefit plans, or
contingent liabilities associated with our participation in a multi-employer
pension plan
• delays in the receipt of equipment and other materials due to disruptions in
the supply chain
• our success in providing broadband solutions to the North Slope and western
Alaska
• our internal control over financial reporting may not be effective, which
could cause our financial reporting to be unreliable
• the matters described under Item 1A. Risk Factors in our Annual Report on
Forms 10-K and 10-K/A for the year ended December 31, 2020 .
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
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Table of Contents OVERVIEW
On
On the terms, and subject to the conditions, of the Merger Agreement, Merger Sub
will merge with and into the Company (the "Merger"), with the Company continuing
as the surviving corporation and a wholly-owned subsidiary of Parent. As a
result of the Merger, each share of the Company's common stock issued and
outstanding immediately prior to the effective time of the Merger (the
"Effective Time") (other than shares held by (i) the Company (or a wholly-owned
subsidiary that is disregarded for tax purposes), Parent or Merger Sub and
(ii) stockholders of the Company who have validly exercised and perfected their
appraisal rights under
Consummation of the Merger is subject to certain closing conditions, including,
without limitation, (i) approval of the Merger by the Company's stockholders,
(ii) absence of certain legal impediments, (iii) the expiration or termination
of the required waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"); and (iv) receipt of
regulatory approvals from the Federal Communications Commissions (the "
Refer to the Merger Agreement filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K dated
We are a fiber broadband and managed IT services provider, offering technology
and service enabled customer solutions to business and wholesale customers in
and out of
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practical. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.
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Table of Contents Operating Initiatives
We are focused on being a customer centric fiber broadband and managed IT company. Everything we do is focused around our customer, meeting and exceeding their needs through the application of technology. We are focused on delivering an exceptional customer experience throughout the customer lifecycle. This forms the foundation of our sustained differentiation, creating unique value for our customers to grow our market share, expand business with existing customers while minimizing churn.
Our future investments and subsequent initiatives are focused on building and strengthening the business in three areas:
? Enhance and Augment our Network and Capabilities: This is what we do and is
the basis of our offers, to lead the competition through innovation and
leverage the latest technologies to meet our customer's needs. Activities
include investments to grow our fiber footprint, augmented with high speed
fixed wireless technologies, as well as expanding our product capabilities
that fully leverage our existing and growing fiber footprint.
? Drive Operational Excellence: Invest in operational systems that fundamentally
change the way we deliver services that both enhance the customer experience
as well as increase efficiency and productivity, redefining processes
throughout the entire customer lifecycle to create new operating models and
efficiencies. Investments that update our operational support and billing
systems provide the foundational platform to further leverage digital
technologies and expand with investments in analytics and artificial
intelligence.
? Accelerate the Growth of Managed IT Services: This is a fragmented market
without a leader, a significant market size and a set of services that are
both adjacent and synergistic with communications and networking services. We
continue to invest in winning share and expanding our capabilities, enabling
and accelerating our customers' transition to cloud services.
These investment areas are not standalone and, in fact, are synergistic. We look to maximize each of these with any initiative for the highest return.
We recognize that everything we do is only possible through our people. Our employees are enablers that make any and all initiatives happen to serve our customers and earn their business. We focus on and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.
We will continue to evaluate strategic opportunities that address scale, geographic diversification, and return value to our shareholders.
The Alaska Economy
We operate in a geographically diverse state with unique characteristics. We
monitor the state of the economy in general. In doing so, we compare
? investment activity in the oil and gas markets and the price of crude oil ? tourism levels ? governmental spending and activity of military personnel ? the price and price trends of bandwidth ? the growth in demand for bandwidth ? decline in demand for voice and other legacy services ? local customer preferences ? unemployment levels ? housing activity and development patterns
We have observed variances in the factors affecting the
Historically, the
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Our objective is to continue generating sector leading revenue growth in the
broadband market through investments in sales, service, marketing and product
development while expanding our broadband network capabilities through higher
efficiencies, automation, new technology and expanded service areas. We intend
to continue our growth in the managed IT services market by providing these
services to our broadband customers and leveraging our position as the premier
Cloud Enabler for business in the state of
COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global supply chains and created significant volatility and disruptions to financial markets. The COVID-19 pandemic has also impacted the Company's customers, suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. In response to economic pressures impacting the Company's customers and the community at large as a result of the COVID-19 pandemic, we implemented various actions in 2020 and 2021 including the following:
? Working to increase bandwidth, as needed, for participants in the rural health
care program at no charge to the customer. Timing is subject to FCC guidance
and its waiver of certain rules.
? Offered kindergarten through grade 12, university students and teachers who do
not have internet service, unlimited internet service at no charge through the
end of the spring semester of the 2019-2020 school year.
? Not terminating service to residential and small business customers in the
event they are unable to pay us for services due to disruptions caused by the
COVID-19 pandemic.
? Waiving late fees incurred by residential and small business customers
resulting from their economic circumstances related to the COVID-19 pandemic.
? Waiving long distance overage fees, as appropriate, related to the COVID-19
pandemic.
? Extension of technical support hours.
? Proactively monitoring our network and prioritizing the augmentation of
network links.
? Working with local and state utilities, governments and educational
institutions to ensure they have the necessary resources.
? Established remote working arrangements, including work-from-home, for most of
our administrative employees.
? Implementation of travel restrictions.
? Established appropriate arrangements for our customer service representatives
and customers.
? Proactively assessing and managing facilities and other costs.
Certain of the above actions have been relaxed or reduced beginning in the first quarter of 2021 as disruptions caused by the pandemic have been eliminated or mitigated.
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The COVID-19 pandemic did not have a direct material effect on the Company's revenue, operating expenses and cash flow in the first quarter of 2021 Additional current and potential financial impacts include the following:
? The estimated fair value of service or upgraded service provided to customers
without charge was $0.3 million in the first quarter of 2021. These services
were not recorded as revenue because no cash was expected to be collected from
the customer. The Company's incremental cost of providing this service was not
significant.
? Certain customers have delayed orders for the provision of service.
? As a result of the customer accommodations noted above, collection of accounts
receivable from certain customers has been delayed.
? Disruption of certain of our business and wholesale customers' operations.
? Disruption of the Alaska economy, including crude oil prices and the leisure
and hospitality industries, could negatively impact demand for our products
and services.
? Reductions in consumer spending.
? Government imposed travel restrictions and other actions could reduce the
efficiency of our operations and result in higher costs.
? Declines in revenue and cash flows could require that we further reduce
operating cost and capital spending.
? Delays, cancellation and other disruptions in the provision of products and
services by our vendors.
? Disruption to the financial markets could limit our access to financing and
other sources of capital.
In
We are continuing to assess the potential future impact of the COVID-19 pandemic. The situation continues to evolve, and while the impact on the local and national economy has been mitigated in recent months, we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on the demand for our products and services, operations, financial condition, results of operations or cash flows, which could be material. We will continue to closely monitor the situation and make the appropriate adjustments to our operations as required and appropriate.
Regulatory Update
The items reported under Part I, Item 1. Business - Regulation in our Annual
Report on Form 10-K for the year ended
US Federal Regulatory Matters
Interconnection with Local Telephone Companies and Access to Other Facilities
The Communications Act imposes a number of requirements on local exchange carriers ("LECs"). Generally, a LEC must: interconnect with other telecommunications carriers; not prohibit or unreasonably restrict the resale of its services; provide for telephone number portability so customers may keep the same telephone number if they switch service providers; provide access to their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when a call originates on its network, compensate other telephone companies for terminating or transporting the call.
All of our LEC subsidiaries are considered incumbent LECs ("ILECs") and have additional obligations under the Communications Act, including obligations to unbundle certain elements of their networks for purchase by competitive LECs.
In general, in recent years, the
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Table of Contents USF Contributions
Under the Communications Act of 1934, as amended (the "Communications Act") and
We received
On
At the same time, the
On
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On
We believe that USAC's rural rate database, as currently constituted, is likely
to have an adverse impact on our economic ability to continue to serve some of
our rural healthcare customers. In particular, the rates established by the
database would negatively impact our ability to continue to offer our full range
of telecommunications services to rural healthcare providers supported by the
Telecommunications Program in the more remote, higher-cost areas of the state.
We have requested that the full
We are unable to predict the outcome or eventual impact of the D.C. Circuit's
review of the
USAC Audit of RHC Program Funding Requests
In addition to the prospective changes to the RHC program discussed above, the
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The Company also received a Letter of Inquiry on
Connect America Fund
The Transformation Order also replaced the
We are continuing to work toward meeting our CAF Phase II obligations in a
capital-efficient manner, including the delivery of broadband Internet access
services meeting CAF Phase II requirements using a fixed wireless platform and
DSL in some instances. On
On
Call Authentication
On
On
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The
On
Network Equipment
On
National Suicide Prevention Lifeline
On
Lifeline
Revenue generated from our lifeline customers represents less than 1% of our
total revenue. The
The Consolidated Appropriations Act, 2021 appropriated
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Table of Contents E-Rate
The Company has provided telecommunications services, broadband Internet access
services, and internal connections supported by the
Satellite Services
On
On
Acquisition by a newly formed entity owned by ATN International, Inc. and
Freedom 3
On
State of Alaska Regulatory Matters
Alaska Universal Service Fund
In
Telecommunications Modernization Act
In late
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The RCA opened Docket U-21-003 to consider the joint application filed by ATN
International, Inc. and
Business Plan Core Principles
Our results of operations, financial position and sources and uses of cash in
the current and future periods reflect our focus on being the most successful
broadband solutions company in
? Create a Workplace That Develops Our People and Celebrates Success We believe
an engaged workforce is critical to our success. We are deeply committed to
the development of our people and creating opportunities for them.
? Deliver an Exceptional Customer Experience We strive to deliver service as
promised to our customers and make it right if our customers are not satisfied
with what we delivered. We track virtually every customer interaction and we
utilize the Net Promoter Score framework for assessing the satisfaction of our
customers.
? Augment and Expand Our Network Capabilities and Services Focusing on Efficient
Delivery and Management We are moving toward higher efficiencies and improved
customer experience through automation, new technology and expanded geographic
service areas. Our network architecture is a simpler mix of our fiber
backbone, supported with fixed wireless ("FiWi"), WiFi and satellite.
? Relentlessly Simplify and Transform How We Do Business to Drive Operational
Excellence We believe we must reduce waste, which is defined as any activity
that does not add value to its intended customer. Doing so improves the
experience we deliver to our customers. We make investments in technology and
process improvement, utilize the LEAN framework, and expect these efforts to
meaningfully impact our financial performance in the long-term.
? Accelerate the Growth of Broadband and Managed IT Solutions that Create Market
Differentiation We are building on strength in designing and providing new
products and solutions to our customers.
We believe we can create value for our shareholders by:
? Driving revenue growth through increasing business broadband and managed IT
service revenues,
? Improving our operating and cash flow performance through margin management,
and
? Careful allocation of capital, including selectively investing success-based
capital into opportunities that generate appropriate returns on investments.
Revenue Sources by
We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below. Revenue in the following management's discussion and analysis is presented by customer and product category, combining revenue accounted for under ASC 606 and other guidance.
? Business and Wholesale (broadband, voice and managed IT services)
? Consumer (broadband and voice services)
? Regulatory (access services, high cost support and carrier termination)
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Table of Contents Business and Wholesale
Providing services to Business and Wholesale customers generates the majority of
our revenues and is expected to continue being the primary driver of our growth
in the near term. Our business customers include large enterprises in the oil
and gas industry, health care, education, Alaska Native Corporations, financial
industries, Federal, state and local governments, and small and medium business.
We were the first
Business services have experienced significant growth and we believe the
incremental economics of business services are attractive. Given the demand from
our customers for more bandwidth and services, we expect revenue growth from
these customers to continue for the foreseeable future. We provide services such
as voice and broadband, managed IT services including remote network monitoring
and support, managed IT security and IT professional services, and long-distance
services primarily over our own terrestrial network. We are continuing our
efforts to position the Company as the premier Cloud Enabler for business in the
state of
Our wholesale customers are primarily in-state, national and international telecommunications carriers who rely on us to provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide broadband and voice services to residential customers, including residential homes and multi-dwelling units. Given that our primary competitor has extensive quad play capabilities (video, voice, wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to leverage the capabilities of our existing network and sell customers our highest available bandwidth. Our primary competitive advantage is that we offer reliable internet service without data caps, while our competitor, with certain exceptions, charges customers or throttles customers' speeds for exceeding given levels of data usage. We also continue to expand product and service offerings to this customer group and have implemented fiber fed WiFi and certain fixed wireless technology solutions for providing broadband, all of which is expected to provide a basis for continued growth in this market in 2021.
Regulatory
Regulatory revenue is generated from three primary sources: (i) access charges, which include interstate and intrastate switched access and special access charges, and cellular access; (ii) surcharges billed to the end user (pass-through and non-pass-through); and (iii) federal and state support. We provide voice and broadband origination and termination services to interstate and intrastate carriers. While we are compensated for these services, these revenue streams have been in decline and we expect them to continue to decline, although at a relatively predictable rate. In addition, as regulators have reformed traditional access charges, they have simultaneously implemented new end user surcharges that contribute to our revenue.
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The following table summarizes our primary sources of regulatory revenue and their contribution to total revenue in 2020 (dollars in thousands).
As a % of As a %
Regulatory of Total
Source Description 2020 Revenue Revenue Revenue
Access Charges
Interstate and intrastate
switched access are services
based primarily on originating
and terminating access minutes
from other carriers. Special
access is primarily access to
dedicated circuits sold to
wholesale customers,
substantially all of which is
generated from interstate
services. Cellular access is
the transport of local network
services between switches for
cellular companies based on
individually negotiated
contracts. Access charges have
declined an average of
approximately 11% annually over
the past three years. $ 3,418 8.3 % 1.4 %
Total Access Charges $ 3,418 8.3 % 1.4 %
Surcharges
We assess our customers for
surcharges, typically on a
monthly basis, as required by
various state and federal
regulatory agencies, and remit
these surcharges to these
agencies. These pass-through
surcharges include Federal
Universal Access and State
Universal Access. These
surcharges vary from year to
year, and are primarily
Pass-Through recognized as revenue, and the
subsequent remittance to the
state or federal agency as a
cost of sale and service. The
rates imposed by the regulators
continue to increase. However,
because the charges are only
assessed on a portion of our
services, and that portion
continues to decline, we expect
these revenue streams to
decline over time as the
revenue base declines. $ 5,275 12.8 % 2.2 %
Other non-pass-through
surcharges are collected from
our customers as authorized by
the regulatory body. The amount
charged is based on the type of
line: single line business,
multi-line business, consumer
or lifeline. The rates are
Other established based on federal or
state orders. These charges are
recorded as revenue and do not
have a direct associated cost.
Rather, they represent a
revenue recovery mechanism
established by the FCC or the
Regulatory Commission of
Alaska. $ 9,882 24.0 % 4.1 %
Total Surcharges $ 15,157 36.8 % 6.3 %
Federal and State Support
In 2016, the FCC released the
CAF Phase II order specific to
Alaska Communications which
transitioned from CAF Phase I
frozen support to CAF Phase II.
Funding under the new program
generally requires the Company
CAF II to provide broadband service to
unserved locations throughout
the designated coverage area by
the end of a specified
build-out period, and meet
interim milestone build-out
obligations. CAF II revenues
are expected to be relatively
stable through 2026. $ 19,694 47.9 % 8.2 %
We are required by the State of
Alaska to provide and maintain
local services for retail and
carrier-to-carrier
telecommunication throughout
certain local exchange
ENS facilities. Funds received from
the State under the Essential
Network Support ("ENS") program
is to be used to fund capital
expenditures or pay ongoing
operation and maintenance
expenses. $ 2,873 7.0 % 1.2 %
Total Federal and State Support $ 22,567 54.9 % 9.4 %
Total Regulatory Revenue $ 41,142 17.1 %
Total Revenue $ 240,569
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Table of Contents Executive Summary
The COVID-19 pandemic did not have a material impact on the Company's revenue,
operating income and cash flows in the first quarters of 2021 and 2020. Free or
upgraded service with a total value of approximately
Operating Revenues
Total revenue of
Operating Income
Operating income of
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Table of Contents Liquidity
We generated cash from operating activities of
In the first quarter of 2021 and 2020, we invested a total of
Net debt (defined as total debt excluding debt issuance costs, less cash and
cash equivalents) at
Other Initiatives
We have expanded our network to over 198,000 terrestrial and submarine fiber miles.
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Table of Contents RESULTS OF OPERATIONS
Three Months Ended
The following table summarizes our results of operations for the three-month
periods ended
(in thousands) 2021 2020 Change % Change
Revenue
Business and wholesale revenue Business broadband$ 16,242 $ 15,639 $ 603 3.9 % Business voice and other 7,137 7,236 (99 ) -1.4 % Managed IT services 1,217 1,227 (10 ) -0.8 % Equipment sales and installations 2,618 1,414 1,204 85.1 % Wholesale broadband 12,636 11,979 657 5.5 % Wholesale voice and other 1,121 1,288 (167 ) -13.0 % Total business and wholesale revenue 40,971 38,783 2,188 5.6 % Consumer revenue Broadband 6,945 6,692 253 3.8 % Voice and other 2,230 2,449 (219 ) -8.9 % Total consumer revenue 9,175 9,141 34 0.4 % Total business, wholesale and consumer revenue 50,146 47,924 2,222 4.6 % Growth in broadband revenue 4.4 % Regulatory revenue Access 5,599 5,418 181 3.3 % High cost support 4,923 4,924 (1 ) 0.0 % Total regulatory revenue 10,522 10,342 180 1.7 % Total operating revenues$ 60,668 $ 58,266 $ 2,402 4.1 % Operating expenses: Cost of services and sales (excluding depreciation and amortization) 27,366 27,114 252 0.9 % Selling, general and administrative 18,289 15,394 2,895 18.8 % Transaction and termination costs 923 - 923 NM Depreciation and amortization 11,048 9,840 1,208 12.3 % Loss on disposal of assets, net 84 86 (2 ) -2.3 % Total operating expenses 57,710 52,434 5,276 10.1 % Operating income 2,958 5,832 (2,874 ) -49.3 % Other income and (expense): Interest expense (2,652 ) (2,959 ) 307 -10.4 % Interest income 3 75 (72 ) -96.0 % Other income, net 393 381 12 3.1 % Total other income and (expense) (2,256 ) (2,503 ) 247 -9.9 % Income before income tax expense 702 3,329 (2,627 ) -78.9 % Income tax expense (118 ) (960 ) 842 -87.7 % Net income 584 2,369 (1,785 ) -75.3 % Less net loss attributable to noncontrolling interest (22 ) (18 ) (4 ) 22.2 % Net income attributable toAlaska Communications$ 606 $ 2,387 $ (1,781 ) -74.6 % 41
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Table of Contents Operating Revenue
The COVID-19 pandemic did not have a material effect on the Company's revenue in the first quarters of 2021 and 2020.
Business and Wholesale
Business and wholesale revenue of
Business and wholesale revenue include the amortization of deferred revenue for
the three-month periods ended
2021 2020
GCI capacity revenue $ 511 $ 516 Other deferred capacity revenue 1,230 844
Total deferred capacity revenue 1,741 1,360
Other deferred revenue 1,042 997 Total$ 2,783 $ 2,357 Consumer
Consumer revenue of
Regulatory
Regulatory revenue of
Operating Expenses
Cost of Services and Sales (excluding depreciation and amortization)
Cost of services and sales (excluding depreciation and amortization) of
Selling, General and Administrative
Selling, general and administrative expenses of
Transaction and Termination Costs
Transaction costs associated with the Merger Agreement of
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Depreciation and Amortization
Depreciation and amortization expense of
Other Income and Expense
Interest expense of
Income Taxes
Income tax expense and the effective tax rate in the first quarter of 2021 of
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to the noncontrolling interest of the AQ-JV was
Net Income Attributable to
Net income attributable to
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We satisfied our cash requirements for operations and capital expenditures in
the first quarter of 2021 through internally generated funds and cash on hand.
At
Our major sources and uses of funds in the three months ended
(in thousands) 2021 2020
Net cash provided by operating activities
$ (6,902 ) $ (7,463 ) Change in unsettled capital expenditures$ (4,248 ) $ (3,759 ) Repayments of long-term debt$ (2,265 ) $ (3,240 ) Interest paid (1)$ (2,544 ) $ (2,919 )
(1) Included in net cash provided by operating activities.
Cash Flows from Operating Activities
Cash provided by operating activities of
Cash provided by operating activities of
Cash Flows from Investing Activities
Cash used by investing activities of
Cash used by investing activities of
Our networks require the timely maintenance of plant and infrastructure. Future capital requirements may change due to impacts of regulatory decisions that affect our ability to recover our investments, changes in technology, the effects of competition, changes in our business strategy, and our decision to pursue specific acquisition and investment opportunities. We also engage in capital projects which may be pre-funded, in part, by the customer. Capital spending is typically higher during the second and third quarters. We intend to fund future capital expenditures primarily with cash on hand and net cash generated from operations.
Cash Flows from Financing Activities
Cash used by financing activities of
Cash used by financing activities of
Liquidity and Capital Resources
Consistent with our history, our current and long-term liquidity could be impacted by a number of challenges, including, but not limited to: (i) potential future reductions in our revenues resulting from governmental and public policy changes, including regulatory actions affecting inter-carrier compensation, changes in revenue from Universal Service Funds, and the timing of Rural Health Care Program funding receipts; (ii) servicing our debt and funding principal payments; (iii) the funding of other obligations, including our pension plans and lease commitments; (iv) competitive pressures in the markets we serve; (v) the capital intensive nature of our industry; (vi) our ability to respond to and fund the rapid technological changes inherent to our industry, including new products; (vii) funding of costs associated with the Merger Agreement; and (viii) our ability to obtain adequate financing to support our business and pursue growth opportunities.
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We are responding to these challenges by (i) driving top line growth in broadband service revenues with a focus on business and wholesale customers; (ii) managing our cost structure to deliver consistent Adjusted EBITDA and Adjusted Free Cash flow performance; and (iii) prioritizing our capital spending.
The COVID-19 pandemic did not materially impact the Company's cash flows in the
first quarter of 2021. It has also not impacted the Company's access to capital
and financial resources, debt service and compliance with its debt covenants and
overall liquidity through
In the first quarter of 2021, the Company and the
Certain of our capital projects are prefunded, in part, by the customer to whom the associated services will be provided. We also enter into lease agreements, including for dark fiber, requiring significant long-term funding commitments. The leased fiber is typically subleased to our customers who, in some cases, prefund their payments to the Company.
As of
The obligations under the 2019 Senior Credit Facility are secured by substantially all of the personal property and real property of the Company, subject to certain agreed exceptions. The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy. The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company's common stock.
Financial covenants as defined in the agreement are summarized below.
Maximum Net Total Leverage Ratio: The ratio of our (a) total debt, less unrestricted cash and cash equivalents held in pledged accounts, less cash drawn under the Delayed-Draw Term A Facility held for specified capital projects to (b) Consolidated EBITDA (as defined more specifically below) for the consecutive four fiscal quarters ending as of the calculation date. The maximum allowable net total leverage ratio is provided in the table below.
Period Ratio
2.50 to 1.00
The actual net total leverage ratio was 2.50 at
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Fixed Charge Coverage Ratio: The ratio of our (a) Consolidated EBITDA for the
applicable period (as defined below) to (b) (i) the sum of, for the same period,
consolidated interest expense, capital expenditures (with certain exceptions),
long term indebtedness (with certain exceptions) required to be paid, capital
lease obligations required to be paid, restricted payments, cash payments for
income taxes, (ii) minus, for the same period, specified capital expenditures.
The remaining applicable periods for purposes of calculating this ratio are the
four consecutive fiscal quarters ending
Consolidated EBITDA, as defined in the 2019 Senior Credit Facility, is not a
GAAP measure and is defined as consolidated net income attributable to
? cash and non-cash interest expense;
? depreciation and amortization expense;
? income taxes;
? other non-cash charges and expenses, including equity-based compensation
expense;
? the write down or write off of any assets, other than accounts receivable;
? subject to limitation, fees, premiums, penalty payments and out-of-pocket
transaction costs incurred in connection with the 2019 refinancing
transactions;
? non-cash cost of goods sold associated with certain projects;
? subject to limitation, unusual, non-recurring losses, charges and expenses;
? one-time costs associated with permitted acquisitions;
? cost savings from synergies in connection with permitted acquisitions or
dispositions;
? certain costs required to be expensed in connection permitted acquisitions;
and
? investment losses of unconsolidated entities.
minus (to the extent included in calculating net income attributable to
? unusual, non-recurring gains on permitted sales or dispositions of assets and
casualty events;
? cash and non-cash interest income;
? other unusual nonrecurring items;
? the write up of any asset;
? patronage refunds or similar distributions from any lender;
? deferred revenue associated with certain projects; and
? investment income of unconsolidated entities.
The Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum.
The weighted average interest rate on the 2019 Senior Credit Facility was 5.80%
at
Under the terms of the 2019 Senior Credit Facility, the Company is required to
hedge interest payments on a minimum of
As of
OUTLOOK
We expect to see continued strength in business and wholesale revenues, led by
broadband revenue and managed IT services, focused on the larger enterprise and
carrier customer segments. These revenue increases are driven by continued
demand for broadband as businesses migrate their IT infrastructure to the cloud,
deployment of small cell networks, growth in managed IT services, investments by
Federal agencies in long haul broadband infrastructure and continued progress in
serving new school districts. Continued state of
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Additionally, we are focused on continued implementation of the CAF II program and expect to meet our obligations for 2021.
We also expect continued attention by our Board of Directors on the evaluation of value creating strategic opportunities that address our scale and geographic concentration issues.
We believe that we will have sufficient cash on hand, cash provided by
operations and availability under our 2019 Senior Credit Facility to service our
debt and fund our operations, capital expenditures and other obligations over
the next twelve months. However, our ability to make such an assessment is
dependent upon our future financial performance, which is subject to future
economic conditions and to financial, business, regulatory, competitive entry
and many other factors, many of which are beyond our control and could impact us
during the time period of this assessment. See Item 1A. Risk Factors in our
Annual Report on Forms 10-K and 10-K/A for the year ended
LEGAL
We are involved in various claims, legal actions, personnel matters and
regulatory proceedings arising in the ordinary course of business and as of
HUMAN CAPITAL
Everything we do is only possible through our people. Our employees enable any and all initiatives to serve our customers and earn their business. We focus on and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.
We depend on the availability of personnel with the requisite level of technical
expertise in the telecommunications industry. Our ability to develop and
maintain our networks and execute our business plan is dependent on the
availability of technical engineering, IT, service delivery and monitoring,
product development, sales, management, finance and other key personnel. Because
our operations and customers are primarily based in
In response to the COVID-19 pandemic, the Company has established remote working arrangements, including work-from-home, for most of our administrative employees. Management has also implemented processes for frequent virtual interaction between individual employees and employee groups.
Our Collective Bargaining Agreement ("CBA") with the IBEW, which is effective
through
As of
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
We have identified certain policies and estimates as critical to our business
operations and the understanding of our past or present results of operations.
For additional discussion on the application of significant accounting policies,
see "Critical Accounting Policies and Estimates" in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable and long-lived assets, the value of derivative instruments, deferred capacity revenue, legal contingencies, stock-based compensation and income taxes. As future events and their effects cannot be determined with precision, actual results may differ significantly from those estimates. Changes in those estimates will be reflected in the financial statements of future periods.
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See Note 1 "Summary of Significant Accounting Polices" to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued pronouncements not yet adopted.
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